Newswires
KKR & CO. INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements ofKKR & Co. Inc. , together with its consolidated subsidiaries, and the related notes included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC onFebruary 19, 2021 (our "Annual Report"), including the audited consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under "Cautionary Note Regarding Forward-looking Statements" and "Business Environment" in this report and our Annual Report and "Risk Factors" in our Annual Report, and our other filings with theSEC . Actual results may differ materially from those contained in any forward-looking statements. The unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are hereafter referred to as the "financial statements." Additionally, the condensed consolidated statements of financial condition are referred to herein as the "consolidated statements of financial condition"; the condensed consolidated statements of operations are referred to herein as the "consolidated statements of operations"; the condensed consolidated statements of comprehensive income (loss) are referred to herein as the "consolidated statements of comprehensive income (loss)"; the condensed consolidated statements of changes in equity are referred to herein as the "consolidated statements of changes in equity"; and the condensed consolidated statements of cash flows are referred to herein as the "consolidated statements of cash flows." References herein to "KKR," "we," "us" and "our" refer toKKR & Co. Inc. and its subsidiaries, includingThe Global Atlantic Financial Group LLC ("TGAFG" and, together with its subsidiaries, "Global Atlantic"), unless the context requires otherwise. Overview We are a leading global investment firm that offers alternative asset management and capital markets and insurance solutions. We aim to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in our portfolio companies and communities. We sponsor investment funds that invest in private equity, credit and real assets and have strategic partners that manage hedge funds. Our insurance subsidiaries offer retirement, life and reinsurance products under the management of Global Atlantic. Our asset management business offers a broad range of investment management services to our fund investors and provides capital markets services to our firm, our funds, our portfolio companies and third parties. Throughout our history, we have consistently been a leader in the private equity industry, having completed more than 400 private equity investments in portfolio companies with a total transaction value in excess of$650 billion as ofSeptember 30, 2021 . We have grown our firm by expanding our geographical presence and building businesses in areas such as leveraged credit, alternative credit, capital markets, infrastructure, energy, real estate, growth equity, core and impact investments. Our balance sheet has provided a significant source of capital in the growth and expansion of our business, and has allowed us to further align our interests with those of our fund investors. Building on these efforts and leveraging our industry expertise and intellectual capital have allowed us to capitalize on a broader range of the opportunities we source. Additionally, we have increased our focus on meeting the needs of our existing fund investors and in developing relationships with new investors in our funds. We seek to work proactively and collaboratively as one firm across business lines, departments, and geographies, as appropriate, to achieve what we believe are the best results for our funds and other clients and the firm. Through our offices around the world, we have a pre-eminent global integrated platform for sourcing transactions, raising capital and carrying out capital markets activities. Our growth has been driven by value that we have created through our operationally focused investment approach, the expansion of our existing businesses, our entry into new lines of business, innovation in the products that we offer investors in our funds, an increased focus on providing tailored solutions to our clients and the integration of capital markets distribution activities. As an asset management firm, we earn management, monitoring, transaction and incentive fees and carried interest for providing investment management, monitoring and other services to our funds, vehicles, CLOs, managed accounts and portfolio companies, and we generate transaction-specific income from capital markets transactions. We earn additional investment income by investing our own capital alongside that of our fund investors, from other assets on our balance sheet and from the carried interest we receive from our funds and other investment vehicles. A carried interest entitles the sponsor of a 120
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fund to a specified percentage of investment gains that are generated on
third-party capital that is invested. Beginning in the first quarter of 2021, we
also earn our share of income generated by Global Atlantic.
Our investment teams have deep industry knowledge and are supported by a substantial and diversified capital base; an integrated global investment platform; the expertise of operating professionals, senior advisors and other advisors; and a worldwide network of business relationships that provide a significant source of investment opportunities, specialized knowledge during due diligence and substantial resources for creating and realizing value for stakeholders. These teams invest capital, a substantial portion of which is of a long duration. As ofSeptember 30, 2021 , 89% of our capital is not subject to redemption for at least 8 years from inception and 45% of our capital is from strategic investor partnerships and investment funds and vehicles that have an indefinite term and for which there is no immediate requirement to return invested capital to investors upon realization of investments. This capital provides us with significant flexibility to increase the value of the investments and select exit opportunities. We believe that these aspects of our business will help us continue to expand and grow our business and deliver strong investment performance in a variety of economic and financial conditions. Our insurance business is operated by Global Atlantic, in which we acquired a majority controlling interest onFebruary 1, 2021 . In connection with the acquisition, KKR also became the investment manager for Global Atlantic's insurance companies. GlobalAtlantic is a leadingU.S. annuity and life insurance company that provides a broad suite of protection, legacy and savings products and reinsurance solutions to clients across individual and institutional markets. GlobalAtlantic primarily offers individuals fixed-rate annuities, fixed-indexed annuities and targeted life products through a network of banks, broker dealers and independent marketing organizations. GlobalAtlantic provides its institutional clients customized reinsurance solutions, including block, flow and pension risk transfer reinsurance, as well as funding agreements. GlobalAtlantic primarily generates income by earning a spread between its investment income and the cost of policyholder benefits. As ofSeptember 30, 2021 , Global Atlantic served over three million policyholders. As a result of this acquisition, Global Atlantic's assets and operations have been consolidated with our operating results from and afterFebruary 1, 2021 . Comparability of KKR's results for periods prior and subsequent to the GlobalAtlantic acquisition may accordingly be limited. Our Business In connection with the acquisition of Global Atlantic onFebruary 1, 2021 , we organized our business into two segments: Asset Management and Insurance.The Asset Management segment reflects KKR's historical operations, and the Insurance segment represents Global Atlantic's operations. We operate our asset management business in four business lines: (1) Private Markets, (2) Public Markets, (3) Capital Markets and (4) Principal Activities. Our insurance business is operated by Global Atlantic. Information about our asset management business lines below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . KKR became the investment adviser for Global Atlantic's insurance companies onFebruary 1, 2021 .
Asset Management - Private Markets
Through our Private Markets business line, we manage and sponsor a group of private equity funds that invest capital for long-term appreciation, either through controlling ownership of a company or strategic minority positions. In addition to our traditional private equity funds, we sponsor investment funds that invest in growth equity (including impact) and core investments. We also manage and sponsor investment funds that invest capital in real assets, such as real estate, infrastructure and energy. Our Private Markets business line includes separately managed accounts that invest in multiple strategies, which include our credit strategies as well as our private equity and real assets strategies. These funds and accounts are managed byKohlberg Kravis Roberts & Co. L.P. , anSEC -registered investment adviser. As ofSeptember 30, 2021 , our Private Markets business line had$247.6 billion of AUM, consisting of$147.6 billion in private equity (including growth equity, impact and core investments),$79.5 billion in real assets (including real estate, infrastructure and energy) and$20.5 billion in other related strategies. The table below presents information as ofSeptember 30, 2021 , relating to our investment vehicles in our Private Markets business line for which we have the ability to earn carried interest. This data does not reflect additional capital raised, acquisitions or disposals of investments, changes in investment values, or distributions occurring afterSeptember 30, 2021 . 121
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Investment Period (1) Amount ($ in millions)
Percentage Gross
Committed Accrued
Start End Uncalled by General Remaining Remaining Carried
Date Date
Commitment (2) Commitments Partner Invested Realized
Cost (3) Fair Value Interest
Private Equity and Growth Equity Funds North America Fund XIII 6/2021 6/2027$ 16,788 $ 16,788 7% $ - $ - $ - $ - $ - Americas Fund XII 1/2017 6/2021 13,500 3,959 6% 10,016 3,432 8,910 21,859 2,240 North America Fund XI 9/2012 1/2017 8,718 432 3% 9,733 15,529 3,747 8,373 842 2006 Fund (4) 9/2006 9/2012 17,642 247 2% 17,309 34,287 1,825 3,280 290 Millennium Fund (4) 12/2002 12/2008 6,000 - 3% 6,000 14,123 - 6 1 European Fund V 3/2019 7/2025 6,398 2,695 2% 3,772 350 3,585 5,054 230 European Fund IV 12/2014 3/2019 3,517 67 6% 3,577 3,407 2,279 4,257 362 European Fund III (4) 3/2008 3/2014 5,513 153 5% 5,360 10,602 253 235 (12) European Fund II (4) 11/2005 10/2008 5,751 - 2% 5,751 8,507 - 34 - Asian Fund IV 7/2020 7/2026 14,735 12,630 7% 2,105 - 2,105 2,382 11 Asian Fund III 4/2017 7/2020 9,000 2,332 6% 7,059 1,778
6,586 14,565 1,415 Asian Fund II 4/2013 4/2017 5,825 34 1% 6,839 5,680 3,184 5,017 352 Asian Fund (4) 7/2007 4/2013 3,983 - 3% 3,974 8,723 17 30 5 China Growth Fund (4) 11/2010 11/2016 1,010 - 1% 1,010 1,056 330 242 (4) Next Generation Technology Growth Fund II 12/2019 12/2025 2,088 898 7% 1,272 82 1,242 2,262 172 Next Generation Technology Growth Fund 3/2016 12/2019 659 4 22% 663 652 375 1,854 161 Health Care Strategic Growth Fund II 5/2021 5/2027 3,744 3,744 7% - - - - - Health Care Strategic Growth Fund 12/2016 5/2021 1,331 565 11% 896 196 791 1,352 83 Global Impact Fund 2/2019 2/2025 1,242 416 8% 904 77 851 1,263 72 Private Equity and Growth Equity 127,444 44,964 86,240 108,481 36,080 72,065 6,220 Funds
Co-Investment Vehicles and Other Various Various
12,470 3,874 Various 8,979 6,791 5,865 8,951 1,504 Core Investment Vehicles Various Various 23,384 12,865 32% 10,519 31
10,519 16,944 274
Total Private Equity, Growth Equity and Core Funds 163,298 61,703 105,738 115,303 52,464 97,960 7,998 Real Assets Energy Income and Growth Fund II 6/2018 8/2022 994 577 20% 598 181 444 621 12 Energy Income and Growth Fund 9/2013 6/2018 1,974 - 13% 1,971 876 1,203 1,137 - Natural Resources Fund (4) Various Various 887 - Various 887 123 193 84 - Global Energy Opportunities Various Various 915 64 Various 519 163 327 204 - Global Infrastructure Investors IV 6/2021 6/2027 14,998 14,998 3% - - - - - Global Infrastructure Investors III 6/2018 6/2021 7,186 3,348 4% 4,073 336 3,964 4,314 - Global Infrastructure Investors II 10/2014 6/2018 3,040 123 4% 3,163 3,394 1,748 2,619 85 Global Infrastructure Investors 9/2011 10/2014 1,040 - 5% 1,050 2,228 - - - Asia Pacific Infrastructure Investors 1/2020 1/2026 3,792 2,954 7% 880 43 853 1,121 41 Diversified Core Infrastructure Fund 12/2020 (5) 6,783 6,073 7% 711 13 711 794 - Real Estate Partners Americas III 12/2020 1/2025 4,339 4,339 7% - - - - - Real Estate Partners Americas II 5/2017 12/2020 1,921 271 8% 1,886 807 1,449 2,116 123 Real Estate Partners Americas 5/2013 5/2017 1,229 143 16% 1,016 1,397 183 80 3 Real Estate Partners Europe II 12/2019 4/2024 2,106 1,498 9% 608 - 608 746 11 Real Estate Partners Europe 9/2015 12/2019 713 160 10% 632 519 302 405 21 Asia Real Estate Partners 6/2019 6/2023 1,682 1,423 15% 259 - 259 319 1 Real Estate Credit Opportunity Partners II 4/2019 6/2022 950 507 5% 443 56 443 464 6 Real Estate Credit Opportunity Partners 2/2017 4/2019 1,130 122 4% 1,008 301 1,008 974 - Property Partners Americas 12/2019 (5) 2,413 795 21% 1,618 44 1,618 1,930 13 Co-Investment Vehicles and Other Various Various 4,619 494 Various 3,840 1,524 3,401 3,709 12 Total Real Assets 62,711 37,889 25,162 12,005
18,714 21,637 328
Other
Unallocated Commitments (6) 1,460 1,460 Various - - - - - Private Markets Total$ 227,469 $ 101,052 $ 130,900 $ 127,308 $ 71,178 $ 119,597 $ 8,326 (1)The start date represents the date on which the general partner of the applicable fund commenced investment of the fund's capital or the date of the first closing. The end date represents the earlier of (i) the date on which the general partner of the applicable fund was or will be required by the fund's governing agreement to cease making investments on behalf of the fund, unless extended by a vote of the fund investors, and (ii) the date on which the last investment was made. (2)The commitment represents the aggregate capital commitments to the fund, including capital commitments by third-party fund investors and the general partner. Foreign currency commitments have been converted intoU.S. dollars based on (i) the foreign exchange rate at the date of purchase for each investment and (ii) the exchange rate that prevailed onSeptember 30, 2021 , in the case of uncalled commitments. (3)The remaining cost represents the initial investment of the general partner and limited partners, reduced for returns of capital, with the limited partners' investment further reduced for any realized gains from which the general partner did not receive a carried interest. (4)The "Invested" and "Realized" columns do not include the amounts of any realized investments that restored the unused capital commitments of the fund investors, if any. (5)Open ended fund. (6)"Unallocated Commitments" represent unallocated commitments from our strategic investor partnerships. 122
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The table below presents information as ofSeptember 30, 2021 , relating to the historical performance of certain of our Private Markets investment vehicles since inception, which we believe illustrates the benefits of our investment approach. This data does not reflect additional capital raised sinceSeptember 30, 2021 , or acquisitions or disposals of investments, changes in investment values or distributions occurring after that date. However, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of future results. Amount Fair Value of Investments Gross Net Gross Multiple of Invested Private Markets Investment Funds Commitment Invested Realized (4) Unrealized Total ValueIRR (5) IRR (5) Capital (5) ($ in millions) Legacy Funds (1) 1976 Fund$ 31 $ 31 $ 537 $ -$ 537 39.5 % 35.5 % 17.1 1980 Fund 357 357 1,828 - 1,828 29.0 % 25.8 % 5.1 1982 Fund 328 328 1,291 - 1,291 48.1 % 39.2 % 3.9 1984 Fund 1,000 1,000 5,964 - 5,964 34.5 % 28.9 % 6.0 1986 Fund 672 672 9,081 - 9,081 34.4 % 28.9 % 13.5 1987 Fund 6,130 6,130 14,949 - 14,949 12.1 % 8.9 % 2.4 1993 Fund 1,946 1,946 4,143 - 4,143 23.6 % 16.8 % 2.1 1996 Fund 6,012 6,012 12,477 - 12,477 18.0 % 13.3 % 2.1 Subtotal - Legacy Funds 16,475 16,475 50,269 - 50,269 26.1 % 19.9 % 3.1 Included FundsEuropean Fund (1999) (2) 3,085 3,085 8,758 - 8,758 26.9 % 20.2 % 2.8Millennium Fund (2002) 6,000 6,000 14,123 6 14,129 22.0 % 16.1 % 2.4 European Fund II (2005) (2) 5,751 5,751 8,507 34 8,541 6.1 % 4.5 % 1.5 2006 Fund (2006) 17,642 17,309 34,287 3,280 37,567 12.0 % 9.4 % 2.2Asian Fund (2007) 3,983 3,974 8,723 30 8,753 18.9 % 13.7 % 2.2 European Fund III (2008) (2) 5,513 5,360 10,602 235 10,837 16.6 % 11.5 % 2.0E2 Investors (Annex Fund ) (2009) (2) 196 196 200 - 200 0.6 % 0.5 % 1.0China Growth Fund (2010) 1,010 1,010 1,056 242 1,298 6.3 % 2.1 % 1.3Natural Resources Fund (2010) 887 887 123 84 207 (22.8) % (24.4) % 0.2Global Infrastructure Investors (2011) (2) 1,040 1,050 2,228 - 2,228 17.6 % 15.6 % 2.1 North America Fund XI (2012) 8,718 9,733 15,529 8,373 23,902 24.0 % 19.4 % 2.5 Asian Fund II (2013) 5,825 6,839 5,680 5,017 10,697 12.8 % 9.4 % 1.6 Real Estate Partners Americas (2013) 1,229 1,016 1,397 80 1,477 16.8 % 12.0 % 1.5Energy Income and Growth Fund (2013) 1,974 1,971 876 1,137 2,013 0.5 % (1.8) % 1.0 Global Infrastructure Investors II (2014) (2) 3,040 3,163 3,394 2,619 6,013 20.8 % 18.1 % 1.9 European Fund IV (2015) (2) 3,517 3,577 3,407 4,257 7,664 26.5 % 20.9 % 2.1 Real Estate Partners Europe (2015) (2) 713 632 519 405 924 15.7 % 10.9 % 1.5Next Generation Technology Growth Fund (2016) 659 663 652 1,854 2,506 49.8 % 43.3 % 3.8Health Care Strategic Growth Fund (2016) 1,331 896 196 1,352 1,548 43.8 % 28.7 % 1.7 Americas Fund XII (2017) 13,500 10,016 3,432 21,859 25,291 48.1 % 39.8 % 2.5Real Estate Credit Opportunity Partners (2017) 1,130 1,008 301 974 1,275 8.2 % 7.2 % 1.3 Core Investment Vehicles (2017) 23,384 10,519 31 16,944 16,975 27.9 % 26.9 % 1.6 Asian Fund III (2017) 9,000 7,059 1,778 14,565 16,343 53.0 % 42.5 % 2.3 Real Estate Partners Americas II (2017) 1,921 1,886 807 2,116 2,923 30.6 % 25.1 % 1.5 Global Infrastructure Investors III (2018) (2) 7,186 4,073 336 4,314 4,650 9.2 % 6.0 % 1.1Global Impact Fund (2019) 1,242 904 77 1,263 1,340 59.8 % 42.5 % 1.5 European Fund V (2019) (2) 6,398 3,772 350 5,054 5,404 41.9 % 32.7 % 1.4 Energy Income and Growth Fund II (2019) 994 598 181 621 802 20.3 % 17.7 % 1.3Asia Real Estate Partners (2019) 1,682 259 - 319 319 25.9 % 7.2 % 1.2 Next Generation Technology Growth Fund II (2019) (3) 2,088 1,272 82 2,262 2,344 - - -Asia Pacific Infrastructure Investors (2019) (3) 3,792 880 43 1,121 1,164 - - - Real Estate Credit Opportunity Partners II (2019) (3) 950 443 56 464 520 - - - Asian Fund IV (2020) (3) 14,735 2,105 - 2,382 2,382 - - - Real Estate Partners Americas III (2021) (3) 4,339 - - - - - - - Real Estate Partners Europe II (2021) (2)(3) 2,106 608 - 746 746 - - - Health Care Strategic Growth Fund II (2021) (3) 3,744 - - - - - - - Global Infrastructure Investors IV (2021) (3) 14,998 - - - - - - - North America Fund XIII (2021) (3) 16,788 - - - - - - - Subtotal - Included Funds 202,090 118,514 127,730 104,009 231,739 17.2 % 13.3 % 2.0 All Funds$ 218,565 $ 134,989 $ 178,000 $ 104,009 $ 282,009 25.6 % 18.9 % 2.1 123
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(1)These funds were not contributed to KKR as part of the acquisition of the assets and liabilities ofKKR & Co. (Guernsey) L.P. (formerly known asKKR Private Equity Investors, L.P. ) onOctober 1, 2009 (the "KPE Transaction"). (2)The following table presents information regarding investment funds with euro-denominated commitments. Such amounts have been converted intoU.S. dollars based on (i) the foreign exchange rate at the date of purchase for each investment and (ii) the exchange rate prevailing onSeptember 30, 2021 , in the case of unfunded commitments. Private Markets Investment Funds Commitment (€ in millions) European Fund € 197 European Fund II € 2,598 European Fund III € 2,883 E2 Investors (Annex Fund) € 56 Global Infrastructure Investors € 30 Global Infrastructure Investors II € 244 European Fund IV € 1,626 Real Estate Partners Europe € 277 Global Infrastructure Investors III € 987 European Fund V € 2,144 Real Estate Partners Europe II € 768 (3)The gross IRR, net IRR and gross multiple of invested capital are calculated for our investment funds that made their first investment at least 24 months prior toSeptember 30, 2021 . None of theNext Generation Technology Growth Fund II,Asia Pacific Infrastructure Investors , Real Estate Credit Opportunities Partners II, Asian Fund IV, Real Estate Partners Americas III, Real Estate Partners Europe II, Health Care Strategic Growth Fund II, Global Infrastructure Investors IV, North America Fund XIII,Diversified Core Infrastructure Fund , or Property Partners Americas, has invested for at least 24 months as ofSeptember 30, 2021 . We therefore have not calculated gross IRRs, net IRRs and gross multiples of invested capital with respect to those funds. (4)An investment is considered realized when it has been disposed of or has otherwise generated disposition proceeds or current income that has been distributed by the relevant fund. In periods prior to the three months endedSeptember 30, 2015 , realized proceeds excluded current income such as dividends and interest. (5)IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period. Net IRRs are calculated after giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees and organizational expenses. Gross IRRs are calculated before giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees and organizational expenses. The gross multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the fund. Such amounts do not give effect to the allocation of realized and unrealized carried interest or the payment of any applicable management fees or organizational expenses. KKR's Private Markets funds may utilize third-party financing facilities to provide liquidity to such funds. The above net and gross IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund, and the use of such financing facilities generally decreases the amount of time that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. KKR's Private Markets funds also generally provide in certain circumstances, which vary depending on the relevant fund documents, for a portion of capital returned to investors to be restored to unused commitments as recycled capital. For KKR's Private Markets funds that have a preferred return, we take into account recycled capital in the calculation of IRRs and multiples of invested capital because the calculation of the preferred return includes the effect of recycled capital. For KKR's Private Markets funds that do not have a preferred return, we do not take recycled capital into account in the calculation of IRRs and multiples of invested capital. The inclusion of recycled capital generally causes invested and realized amounts to be higher and IRRs and multiples of invested capital to be lower than had recycled capital not been included. The inclusion of recycled capital would reduce the composite net IRR of all Included Funds by 0.1% and the composite net IRR of all Legacy Funds by 0.5% and would reduce the composite multiple of invested capital of Included Funds by less than 0.1 and the composite multiple of invested capital of Legacy Funds by 0.4.
Asset Management - Public Markets
Through our Public Markets business line, we operate our credit and hedge
funds platforms on a combined basis. Our credit business invests capital in (i)
leveraged credit strategies, including leveraged loans, high-yield bonds,
opportunistic credit and revolving credit strategies, and (ii) alternative
credit strategies, including special situations or dislocation strategies and
private credit strategies such as direct lending and private opportunistic
credit (including mezzanine and asset-based finance) investment strategies. The
funds, CLOs, separately managed accounts, investment companies registered under
the Investment Company Act of 1940 (the "Investment Company Act") and
alternative investment funds ("AIFs") in our leveraged credit and alternative
credit strategies are managed by KKR Credit Advisors (US) LLC , which is an
SEC -registered investment adviser, KKR Credit Advisors (Ireland) Unlimited
Company , which is regulated by the Central Bank of Ireland ("CBI"), and KKR
Credit Advisors (Singapore) Pte. Ltd. , which is regulated by the Monetary
Authority of Singapore and also registered with the SEC . Our business
development company ("BDC") platform consists of a BDC advised by FS/KKR
Advisor, LLC ("FS/KKR Advisor"), which is an investment adviser jointly owned by
KKR and Franklin Square Holdings, L.P. ("FS Investments"). Our
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Public Markets business line also includes our hedge funds platform, which consists of strategic partnerships with third-party hedge fund managers in which KKR owns a minority stake (which we refer to as "hedge fund partnerships"). Our hedge fund partnerships offer a variety of investment strategies, including equity hedge funds, hedge fund-of-funds and credit hedge funds. As ofSeptember 30, 2021 , our Public Markets business line had$211.5 billion of AUM, comprised of$110.3 billion of assets managed in our leveraged credit strategies (which include$6.2 billion of assets managed in our opportunistic credit strategy and$1.9 billion of assets managed in our revolving credit strategy),$7.8 billion of assets managed in our special situations or dislocation strategies,$65.4 billion of assets managed in our private credit strategies,$26.5 billion of assets managed through our hedge fund platform, and$1.5 billion of assets managed in other strategies. Our private credit strategies include$24.6 billion of assets managed in our direct lending strategy,$30.9 billion of assets managed in our private opportunistic credit strategy and$9.9 billion of assets managed in other private credit strategies. Our BDC has approximately$16.6 billion in combined assets under management, which are reflected in the AUM of our leveraged credit strategies and alternative credit strategies above. We report all of the assets under management of the BDC. We report only a pro rata portion of the AUM in our strategic partnership with third-party hedge fund managers based on KKR's percentage ownership in them. Credit
Performance
We generally review our performance in our credit business by investment strategy. Our leveraged credit strategies principally invest through separately managed accounts, a BDC, CLOs and investment funds. In certain cases, these strategies have meaningful track records and may be compared to widely-known indices. The following table presents information regarding larger leveraged credit strategies managed by KKR from inception toSeptember 30, 2021 . The information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of any future result. Leveraged Credit Strategies: Inception-to-Date Annualized Gross Performance vs. Benchmark by Strategy Benchmark Leveraged Credit Gross Net Gross Strategy Inception Date Returns Returns Benchmark (1) Returns Bank Loans Plus High 65% S&P/LSTA Loan Index, 35% BoAML HY Yield Jul 2008 7.45 % 6.85 % Master II Index (2) 5.98 % 50% S&P/LSTA Loan Index, 50% BoAML HY Opportunistic Credit (3) May 2008 11.47 % 9.71 % Master II Index (3) 6.27 % Bank Loans Apr 2011 5.34 % 4.76 % S&P/LSTA Loan Index (4) 4.30 % High-Yield Apr 2011 7.07 % 6.49 % BoAML HY Master II Index (5) 6.37 % Bank Loans Conservative Apr 2011 4.52 % 3.94 % S&P/LSTA BB-B Loan Index (6) 4.27 % European Leveraged Loans CS Inst West European Leveraged Loan (7) Sep 2009 4.69 % 4.17 % Index (8) 3.66 % High-Yield Conservative Apr 2011 6.32 % 5.74 % BoAML HY BB-B Constrained (9) 6.32 % European Credit S&P European Leveraged Loans (All Opportunities (7) Sept 2007 6.01 % 5.12 % Loans) (10) 4.18 % Revolving Credit (11) May 2015 N/A N/A N/A N/A (1)The benchmarks referred to herein include the S&P/LSTA Leveraged Loan Index (the "S&P/LSTA Loan Index"), S&P/LSTAU.S. B/BB Ratings Loan Index (the "S&P/LSTA BB-B Loan Index"), the Bank of America Merrill Lynch High Yield Master II Index (the "BoAML HY Master II Index"), theBofA Merrill Lynch BB-B US High Yield Index (the "BoAML HY BB-B Constrained"), theCredit Suisse Institutional Western European Leveraged Loan Index (the "CS Inst West European Leveraged Loan Index"), and S&P European Leveraged Loans (All Loans). The S&P/LSTA Loan Index is a daily tradable index for theU.S. loan market that seeks to mirror the market-weighted performance of the largest institutional loans that meet certain criteria. The S&P/ LSTA BB-B Loan Index is comprised of loans in the S&P/LSTA Loan Index, whose rating is BB+, BB, BB-, B+, B or B-. The BoAML HY Master II Index is an index for high-yield corporate bonds. It is designed to measure the broad high-yield market, including lower-rated securities. The BoAML HY BB-B Constrained is a subset of the BoAML HY Master II Index including all securities rated BB1 through B3, inclusive. The CS Inst West European Leveraged Loan Index contains only institutional loan facilities priced above 90, excluding TL and TLa facilities and loans ratedCC, C or are in default. The S&P European Leveraged Loan Index reflects the market-weighted performance of institutional leveraged loan portfolios investing in European credits. While the returns of our leveraged credit strategies reflect the reinvestment of income and dividends, none of the indices presented in the chart above reflect such reinvestment, which has the effect of increasing the reported relative performance of these strategies as compared to the indices. Furthermore, these indices are not subject to management fees, incentive allocations, or expenses. (2)Performance is based on a blended composite of Bank Loans Plus High Yield strategy accounts. The benchmark used for purposes of comparison for the Bank Loans Plus High Yield strategy is based on 65% S&P/LSTA Loan Index and 35% BoAML HY Master II Index. (3)The Opportunistic Credit strategy invests in high-yield securities and corporate loans with no preset allocation. The benchmark used for purposes of comparison for the Opportunistic Credit strategy presented herein is based on 50% S&P/LSTA Loan Index and 50% BoAML HY Master II Index. Funds within this strategy may utilize third-party financing facilities to enhance investment returns. In cases where financing facilities are used, the amounts 125
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drawn on the facility are deducted from the assets of the fund in the calculation of net asset value, which tends to increase returns when net asset value grows over time and decrease returns when net asset value decreases over time. (4)Performance is based on a composite of portfolios that primarily invest in leveraged loans. The benchmark used for purposes of comparison for the Bank Loans strategy is based on the S&P/LSTA Loan Index. (5)Performance is based on a composite of portfolios that primarily invest in high-yield securities. The benchmark used for purposes of comparison for the High Yield strategy is based on the BoAML HY Master II Index. (6)Performance is based on a composite of portfolios that primarily invest in leveraged loans rated B-/Baa3 or higher. The benchmark used for purposes of comparison for the Bank Loans Conservative strategy is based on the S&P/LSTA BB-B Loan Index. (7)The returns presented are calculated based on local currency. (8)Performance is based on a composite of portfolios that primarily invest in higher quality leveraged loans. The benchmark used for purposes of comparison for the European Leveraged Loans strategy is based on the CS Inst West European Leveraged Loan Index. (9)Performance is based on a composite of portfolios that primarily invest in high-yield securities rated B or higher. The benchmark used for purposes of comparison for the High-Yield Conservative strategy is based on the BoAML HY BB-B Constrained Index. (10)Performance is based on a composite of portfolios that primarily invest in European institutional leveraged loans. The benchmark used for purposes of comparison for the European Credit Opportunities strategy is based on the S&P European Leveraged Loans (All Loans) Index. (11)This strategy has not called any capital as ofSeptember 30, 2021 . As a result, the gross and net return performance measures are not meaningful and are not included above. Our alternative credit strategies primarily invest in more illiquid instruments through private investment funds, BDC and separately managed accounts. The following table presents information regarding our Public Markets alternative credit commingled funds where investors are subject to capital commitments from inception toSeptember 30, 2021 . Some of these funds have been investing for less than 24 months, and thus their performance is less meaningful and not included below. In addition, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of any future result. Alternative Credit Strategies: Fund Performance
Amount Fair Value of Investments
Gross
Multiple of Accrued
Public Markets Total Gross Net Invested Capital Carried
Investment Funds Inception Date
Commitment Invested (1) Realized (1) Unrealized ValueIRR (2) IRR (2) (3) Interest ($ in Millions)Dislocation Opportunities Fund May 2020 $ 2,910 $ 1,515 $ 119$ 1,704 $ 1,823 N/A N/A N/A$ 37 Special Situations Fund IIDec 2014 3,525 3,241 1,333 2,690 4,023 6.9 % 4.9 % 1.2 -Special Situations Fund Dec 2012 2,274 2,273 1,598 606 2,204 (0.7) % (2.6) % 1.0 -Mezzanine Partners Mar 2010 1,023 990 1,097 245 1,342 10.0 % 6.9 % 1.4 (20) Private Credit Opportunities Partners IIDec 2015 2,245 1,483 546 1,295 1,841 8.2 % 6.6 % 1.2 - Lending Partners IIIApr 2017 1,498 741 264 810 1,074 16.3 % 13.5 % 1.4 26 Lending Partners IIJun 2014 1,336 1,179 1,143 179 1,322 4.3 % 3.0 % 1.1 - Lending PartnersDec 2011 460 419 451 21 472 3.6 % 2.0 % 1.1 - Lending Partners Europe IIJun 2019 837 346 34 383 417 29.6 % 22.9 % 1.2 2 Lending Partners EuropeMar 2015 848 664 354 302 656 (0.4) % (3.0) % 1.0 - Other Alternative Credit Vehicles Various 11,744 6,147 4,292 4,097 8,389 N/A N/A N/A 120 All Funds$ 28,700 $ 18,998 $ 11,231 $ 12,332 $ 23,563 $ 165 (1) Recycled capital is excluded from the amounts invested and realized. (2) These credit funds utilize third-party financing facilities to provide liquidity to such funds, and in such event, IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund. The use of such financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period and are calculated taking into account recycled capital. Net IRRs presented are calculated after giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees. Gross IRRs are calculated before giving effect to the allocation of carried interest and the payment of any applicable management fees. (3) The multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the investors. The use of financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate multiples of invested capital, which tends to increase multiples when fair value grows over time and decrease multiples when fair value decreases over time. Such amounts do not give effect to the allocation of any realized and unrealized returns on a fund's investments to the fund's general partner pursuant to a carried interest or the payment of any applicable management fees and are calculated without taking into account recycled capital. 126
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Public Markets AUM and Vehicle Structures
The table below presents information as ofSeptember 30, 2021 , based on the investment funds, vehicles or accounts offered by our Public Markets business line. Our funds, vehicles and accounts have been sorted based upon their primary investment strategies. However, the AUM and FPAUM presented for each line in the table includes certain investments from non-primary investment strategies, which are permitted by their investment mandates, for purposes of presenting the fees and other terms for such funds, vehicles and accounts. Typical Incentive Fee / Management Carried Preferred Duration ($ in millions) AUM FPAUM Fee Rate Interest Return of Capital Leveraged Credit: Leveraged Credit SMAs/Funds$ 87,607 $ 86,017 0.15% - 1.10% Various (1) Various (1) Subject to redemptions CLOs 21,020 21,020 0.40% - 0.50% Various (1) Various (1) 10-14 Years (2) Total Leveraged Credit 108,627 107,037 Alternative Credit: (3) Special Situations 8,101 4,529 0.50% - 1.75% (4) 10.00 - 20.00% 7.00 - 12.00% 7-15 Years (2) Private Credit 51,666 46,348 0.25% - 1.50% 10.00 - 20.00% 5.00 - 8.00% 8-15 Years (2) Total Alternative Credit 59,767 50,877 Hedge Funds (5) 26,544 26,544 0.50% - 2.00% Various (1) Various (1) Subject to redemptions BDCs (6) 16,561 16,561 0.60% 8.00% 7.00% Indefinite Total$ 211,499 $ 201,019 (1)Certain funds and CLOs are subject to a performance fee in which the manager or general partner of the funds share up to 20% of the net profits earned by investors in excess of performance hurdles (generally tied to a benchmark or index) and subject to a provision requiring the funds and vehicles to regain prior losses before any performance fee is earned. (2)Duration of capital is measured from inception. Inception dates for CLOs were between 2013 and 2021 and for separately managed accounts and funds investing in alternative credit strategies from 2009 through 2021. (3)Our alternative credit funds generally have investment periods of three to five years and our newer alternative credit funds generally earn fees on invested capital during the investment period. (4)Lower fees on uninvested capital in certain vehicles. (5)Hedge Funds represent KKR's pro rata portion of AUM and FPAUM of our hedge fund partnerships. (6)Consists of our BDC advised by FS/KKR Advisor. We report all of the AUM of our BDC in our AUM and FPAUM.
Asset Management - Capital Markets
OurCapital Markets business line is comprised of our global capital markets business, which is integrated with KKR's asset management business lines, and serves our firm, our funds, our portfolio companies and third-party clients by developing and implementing both traditional and non-traditional capital solutions for investments or companies seeking financing. These services include arranging debt and equity financing, placing and underwriting securities offerings, and providing other types of capital markets services that may result in the firm receiving fees, including underwriting, placement, transaction and syndication fees, commissions, underwriting discounts, interest payments and other compensation, which may be payable in cash or securities, in respect of the activities described above. Our capital markets business underwrites credit facilities and arranges loan syndications and participations. When we are sole arrangers of a credit facility, we may advance amounts to the borrower on behalf of other lenders, subject to repayment. When we underwrite an offering of securities on a firm commitment basis, we commit to buy and sell an issue of securities and generate revenue by purchasing the securities at a discount or for a fee. When we act in an agency capacity or best efforts basis, we generate revenue for arranging financing or placing securities with capital markets investors. We may also provide issuers with capital markets advice on security selection, access to markets, marketing considerations, securities pricing, and other aspects of capital markets transactions in exchange for a fee. Our capital markets business also provides syndication services in 127
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respect of co-investments in transactions participated in by KKR funds or
third-party clients, which may entitle the firm to receive syndication fees,
management fees and/or a carried interest.
The capital markets business has a global footprint, with local presence and licenses to carry out certain broker-dealer activities in various countries inNorth America ,Europe ,Asia-Pacific and theMiddle East . Our flagship capital markets subsidiary isKKR Capital Markets LLC , anSEC -registered broker-dealer and a member of theFinancial Industry Regulatory Authority ("FINRA"). 128
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Asset Management - Principal Activities Through our Principal Activities business line, we manage the firm's own assets on our balance sheet and deploy capital to support and grow our asset management business lines. Typically, the funds in our Private Markets and Public Markets business lines contractually require us, as general partner of the funds, to make sizable capital commitments from time to time. We believe making general partner commitments assists us in raising new funds from limited partners by demonstrating our conviction in a given fund's strategy. We also use our balance sheet to bridge investment activity during fundraising by seeding investments for new funds and also to acquire investments in order to help establish a track record for fundraising in new strategies. We also use our own capital to bridge capital selectively for our funds' investments or finance strategic acquisitions and partnerships, although the financial results of an acquired business or hedge fund partnership may be reported in our other business lines. Our Principal Activities business line also provides the required capital to fund the various commitments of our Capital Markets business line when underwriting or syndicating securities, or when providing term loan commitments for transactions involving our portfolio companies and for third parties. Our Principal Activities business line also holds assets that are utilized to satisfy regulatory requirements for our Capital Markets business line and risk retention requirements for our CLOs. We also make opportunistic investments through our Principal Activities business line, which include co-investments alongside our Private Markets and Public Markets funds as well as Principal Activities investments that do not involve our Private Markets or Public Markets funds. We endeavor to use our balance sheet strategically and opportunistically to generate an attractive risk-adjusted return on equity in a manner that is consistent with our fiduciary duties, in compliance with applicable laws, and consistent with our one-firm approach. The chart below presents the holdings of our Principal Activities business line by asset class as ofSeptember 30, 2021 : Holdings by Asset Class (1) [[Image Removed: kkr-20210930_g2.jpg]] (1)General partner commitments in our funds are included in the various asset classes shown above. Assets and revenues of other asset managers with which KKR has formed strategic partnerships where KKR does not hold more than 50% ownership interest are not included in our Principal Activities business line but are reported in the financial results of our other business lines. Private Equity includes KKR private equity funds, co-investments alongside such KKR-sponsored private equity funds, certain core equity investments, and other opportunistic investments. Equity investments in other asset classes, such as real estate, special situations and energy appear in these other asset classes. Other Credit consists of certain leveraged credit and specialty finance strategies. 129
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Insurance - Global Atlantic
Our insurance business is operated by Global Atlantic, which we acquired onFebruary 1, 2021 . KKR owns all of the voting interests in Global Atlantic and a 61.1% economic interest in Global Atlantic as of the closing of the acquisition, which economic interest increased to 61.5% following certain post-closing purchase price adjustments inJune 2021 . The balance of Global Atlantic is owned by third-party investors and Global Atlantic employees. Following the GlobalAtlantic acquisition, Global Atlantic continues to operate as a separate business with its existing brands and management team. Beginning with the first quarter of 2021, we present Global Atlantic's financial results as a separate reportable segment. GlobalAtlantic is a leadingU.S. annuity and life insurance company that provides a broad suite of protection, legacy and savings products and reinsurance solutions to clients across individual and institutional markets. GlobalAtlantic has made the strategic decision to focus on target markets that it believes supports issuing products that have attractive risk and return characteristics. These markets allow Global Atlantic to leverage its strength in distribution and to deploy capital opportunistically across market conditions. GlobalAtlantic primarily offers individuals fixed-rate annuities, fixed-indexed annuities, and targeted life products through a network of banks, broker-dealers, and insurance agencies. GlobalAtlantic provides its institutional clients customized reinsurance solutions, including block, flow and pension risk transfer, as well as funding agreements. GlobalAtlantic primarily generates income by earning a spread between its investment income and the cost of policyholder benefits. As ofSeptember 30, 2021 , Global Atlantic served over three million policyholders. Business Environment Economic and Market Conditions Impact of COVID-19. The outbreak of COVID-19 continues to impactthe United States and other countries throughout the world. For a description of the impact that COVID-19 had and may in the future have on our business, see "Risk Factors-Risks Related to Our Business-COVID-19 continues to impactthe United States and other countries throughout the world, and it has caused and may further cause disruptions to our business and adversely affect our financial results" and "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report. Economic Conditions. As a global investment firm, we are affected by financial and economic conditions globally. Global and regional economic conditions, including those caused by the COVID-19 pandemic, have substantial impact on our financial condition and results of operations, impacting the values of the investments we make, our ability to exit these investments profitably, our ability to raise capital from investors, and our ability to make new investments. Financial and economic conditions inthe United States ,European Union ,Japan ,China , and other major economies are significant contributors to the global economy. During the period endedSeptember 30, 2021 ,the United States continued to show signs of economic improvement, primarily driven by substantial government fiscal and monetary support and its vaccine rollout program. Inflation, however, is on the rise, as dislocations in supply chains and pandemic-related labor shortages both contribute to scarcity of some goods and services. Inthe United States , real GDP is estimated to have expanded by 3.4% at a seasonally adjusted annualized rate in the quarter endedSeptember 30, 2021 , compared to an expansion of 6.7% at a seasonally adjusted annualized rate in the quarter endedJune 30, 2021 ; theU.S. unemployment rate was 4.8% as ofSeptember 30, 2021 , down from 5.9% as ofJune 30, 2021 ; theU.S. core consumer price index was 4.0% on a year-over-year basis as ofSeptember 30, 2021 , down from 4.5% on a year-over-year basis as ofJune 30, 2021 ; and the effective federal funds rate set by theU.S. Federal Reserve was 0.1% as ofSeptember 30, 2021 , flat from 0.1% as ofJune 30, 2021 . During the period endedSeptember 30, 2021 , the Euro Area maintained a second consecutive quarter of expansion, as real GDP is estimated to have risen by 2.2% on a seasonally adjusted quarter-over-quarter basis in the quarter endedSeptember 30, 2021 compared to growth of 2.1% on a seasonally adjusted quarter-over-quarter basis in the quarter endedJune 30, 2021 ; the Euro Area unemployment is estimated to have been 7.5% as ofSeptember 30, 2021 , down from 7.8% as ofJune 30, 2021 ;Euro Area core inflation was 1.9% on a year-over-year basis as ofSeptember 30, 2021 , up from 0.9% on a year-over-year basis as ofJune 30, 2021 ; and the short-term benchmark interest rate set by theEuropean Central Bank was 0.0% as ofSeptember 30, 2021 , unchanged fromJune 30, 2021 . 130
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During the period endedSeptember 30, 2021 , inAsia ,Japan's economy continued to struggle with post-pandemic economic recovery. InJapan , real GDP growth for the quarter endedSeptember 30, 2021 is estimated to be 1.0% on a seasonally adjusted quarter-over-quarter basis, down from 1.9% as ofJune 30, 2021 on a seasonally adjusted quarter-over-quarter basis. Core inflation inJapan remained negative at -0.5% as ofSeptember 30, 2021 , up slightly from -0.9% as ofJune 30, 2021 . InJapan , the short-term benchmark interest rate set by the Bank of Japan was -0.1% as ofSeptember 30, 2021 , unchanged fromJune 30, 2021 . InChina , policymakers introduced a campaign for "common prosperity" focused on promoting a balance among growth, inclusion, and national security considerations, which could weigh on the outlook for economic growth over the medium term. Reported real GDP inChina rose by a modest 0.2% on a seasonally adjusted quarter-over-quarter basis in the quarter endedSeptember 30, 2021 , compared to growth of 1.2% reported for the quarter endedJune 30, 2021 . Reported core inflation inChina was 1.2% as ofSeptember 30, 2021 , up from 0.9% as ofJune 30, 2021 . These and other key issues could have repercussions across regional and global financial markets, which could adversely affect the valuations of our investments. In particular, in response to persistent inflationary pressure, short- and medium-term interest rates may rise, which may adversely impact equity and credit markets and in turn slow economic growth. In addition, commodity prices are generally expected to rise in inflationary environments, and foreign exchange rates may be affected by countries' monetary and fiscal responses to inflationary trends. Other key issues include (i) further developments regarding COVID-19, including the spread of variants like the Delta variant, which may prolong the adverse economic impact of the pandemic on theU.S. and global economies, including supply chain disruptions that promote cost inflation for critical goods and labor shortages, (ii) geopolitical uncertainty such asU.S. -China relations, (iii) political uncertainty caused by, among other things, economic nationalist sentiments, tensions surrounding socioeconomic inequality issues, and the at-times partisan nature ofU.S. government administration, which has potentially global ramifications with regards to policy, (iv) regulatory changes regarding, for example, taxation, international trade, cross-border investments, immigration, stimulus programs and rising levels of debt, (v) volatility or downturn in equity or credit markets, (vi) unexpected shifts in central banks' monetary policies, and (vii) technological advancements and innovations that may disrupt marketplaces and businesses. For a further discussion of how market conditions may affect our businesses, see "Risk Factors-Risks Related to Our Business-Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition," in our Annual Report. In addition, theU.S. Congress is proposing (and after the date of this report may propose other) various significant changes in tax law, including significant changes in the wayU.S. corporations like ourselves and many of ourU.S. portfolio companies are taxed. If enacted, these changes could materially increase the amount of taxes we and our portfolio companies are required to pay. See "Risk Factors-Risks Related to Our Business-Changes in relevant tax laws, regulations or treaties or an adverse interpretation of these items by tax authorities could adversely impact our effective tax rate and tax liability" in our Annual Report. Equity and Credit Markets. Global equity and credit markets have a substantial effect on our financial condition and results of operations. In general, a climate of reasonable interest rates and high levels of liquidity in the debt and equity capital markets provide a positive environment for us to generate attractive investment returns, which also impacts our ability to generate incentive fees and carried interest. Periods of volatility and dislocation in the capital markets raise substantial risks, but also can present us with opportunities to invest at reduced valuations that position us for future growth and investment returns. Low interest rates related to monetary stimulus and economic stagnation may negatively impact expected returns on all types of investments. Higher interest rates in conjunction with slower growth or weaker currencies in some emerging market economies have caused, and may further cause, the default risk of these countries to increase, and this could impact the operations or value of our investments that operate in these regions. Areas that have ongoing central bank quantitative easing campaigns and comparatively low interest rates relative tothe United States could potentially experience further currency volatility and weakness relative to theU.S. dollar. With respect to our insurance business, fluctuations in market interest rates can expose Global Atlantic to the risk of reduced income in respect of its investment portfolio, increases in the cost of acquiring or maintaining its insurance liabilities, increases in the cost of hedging, or other fluctuations in Global Atlantic's financial, capital and operating profile which materially and adversely affect the business. Higher interest rates, periods of changes in rates and lower rates each may result in differing impacts on Global Atlantic's business. See "Risk Factors-Risks Related to Global Atlantic- Interest rate fluctuations and sustained periods of low or high interest rates could adversely affect Global Atlantic's business, financial condition, liquidity, results of operations, cash flows and prospects." In our asset management business, many of our investments are in equities, so a change in global equity prices or in market volatility directly impacts the value of our investments and our profitability as well as our ability to realize investment gains and the receptiveness of fund investors to our investment products. For the quarter endedSeptember 30, 2021 , global equity markets were positive, with the S&P 500 up 0.6% and the MSCI World Index up 0.1% on a total return basis including dividends. Equity market volatility as evidenced by theChicago Board Options Exchange Market Volatility Index (VIX), a measure of volatility, ended at 23.1 as ofSeptember 30, 2021 , increasing from 15.8 as ofJune 30, 2021 . For a discussion of our 131
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valuation methods, see "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report and see also "-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies" in our Annual Report. In our insurance business, a change in equity prices also impacts Global Atlantic's equity-sensitive annuity and life insurance products, including with respect to hedging costs related to and fee-income earned on those products. Many of our investments, particularly in asset management, are in non-investment grade credit instruments, and, particularly in insurance, in investment grade credit instruments. Our funds, our portfolio companies and Global Atlantic also rely on credit financing and the ability to refinance existing debt. Consequently, any decrease in the value of credit instruments that we have invested in or any increase in the cost of credit financing reduces our returns and decreases our net income. Due in part to holdings of credit instruments such as CLOs on our balance sheet, the performance of the credit markets has had an amplified impact on our financial results, as we directly bear the full extent of losses from credit instruments on our balance sheet. Credit markets can also impact valuations because a discounted cash flow analysis is generally used as one of the methodologies to ascertain the fair value of our investments that do not have readily observable market prices. In addition, with respect to our credit instruments, tightening credit spreads are generally expected to lead to an increase, and widening credit spreads are generally expected to lead to a decrease, in the value of these credit investments, if not offset by hedging or other factors. In addition, the significant widening of credit spreads is also typically expected to negatively impact equity markets, which in turn would negatively impact our portfolio and us as noted above. Conversely, widening credit spreads may have a positive impact on our insurance business, as the margin Global Atlantic is able to earn between crediting rates offered on its insurance products and the investment income it earns from its credit investments should increase, and tightening credit spreads may negatively impact the pricing and therefore competitiveness of Global Atlantic's products, adversely impacting sales and growth, or may negatively impact the margins that Global Atlantic earns on sales and transactions. During the quarter endedSeptember 30, 2021 ,U.S. investment grade corporate bond spreads (BofA Merrill Lynch US Corporate Index) widened by 3 basis points andU.S. high-yield corporate bond spreads (BofAML HY Master II Index) widened by 11 basis points. The non-investment grade credit indices were up during the quarter endedSeptember 30, 2021 , with the S&P/LSTA Leveraged Loan Index up 1.1% and the BAML US High Yield Index up 0.9%. During the quarter endedSeptember 30, 2021 , 10-year government bond yields rose 2 basis points inthe United States , rose 31 basis points in theUnited Kingdom , rose 1 basis point inGermany , fell 21 basis points inChina , and rose 1 basis point inJapan . For a further discussion of how market conditions may affect our businesses, see "Risk Factors-Risks Related to Our Business-Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition" in our Annual Report and "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report. For further discussion of the impact of global credit markets on our financial condition and results of operations, see "Risk Factors-Risks Related to the Assets We Manage-Changes in the debt financing markets may negatively impact the ability of our investment funds, their portfolio companies and strategies pursued with our balance sheet assets to obtain attractive financing for their investments or to refinance existing debt and may increase the cost of such financing or refinancing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income," "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition," "Risk Factors-Risks Related to the Assets We Manage-Our funds and our firm through our balance sheet may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" and "Risk Factors-Risks Related to Global Atlantic-Interest rate fluctuations and sustained periods of low or high interest rates could adversely affect Global Atlantic's business, financial condition, liquidity, results of operations, cash flows and prospects" in our Annual Report. For a further discussion of our valuation methods, see "-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies" in our Annual Report. 132
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Foreign Exchange Rates. Foreign exchange rates have a substantial impact on the valuations of our investments that are denominated in currencies other than theU.S. dollar. Currency volatility can also affect our businesses and investments that deal in cross-border trade. The appreciation or depreciation of theU.S. dollar is expected to contribute to a decrease or increase, respectively, in theU.S. dollar value of our non-U.S. investments to the extent unhedged. In addition, an appreciatingU.S. dollar would be expected to make the exports ofU.S. based companies less competitive, which may lead to a decline in their export revenues, if any, while a depreciatingU.S. dollar would be expected to have the opposite effect. Moreover, when selecting investments for our investment funds that are denominated inU.S. dollars, an appreciatingU.S. dollar may create opportunities to invest at more attractiveU.S. dollar prices in certain countries outside ofthe United States , while a depreciatingU.S. dollar would be expected to have the opposite effect. For our investments denominated in currencies other than theU.S. dollar, the depreciation in such currencies will generally contribute to the decrease in the valuation of such investments, to the extent unhedged, and adversely affect theU.S. dollar equivalent revenues of portfolio companies with substantial revenues denominated in such currencies, while the appreciation in such currencies would be expected to have the opposite effect. For the quarter endedSeptember 30, 2021 , the euro fell 2.3%, the British pound fell 2.6%, the Japanese yen fell 0.2%, and the Chinese renminbi rose 0.2%, respectively, relative to theU.S. dollar. For additional information regarding our foreign exchange rate risk, see "Quantitative and Qualitative Disclosure About Market Risk-Exchange Rate Risk" in our Annual Report. Commodity Markets. Our Private Markets portfolio contains energy real asset investments, and certain of our other Private Markets and Public Markets strategies and products, including private equity, direct lending, special situations and CLOs, also have meaningful investments in the energy sector. The value of these investments is heavily influenced by the price of natural gas and oil. During the quarter endedSeptember 30, 2021 , the 3-year forward price of WTI crude oil increased approximately 4%, and the 3-year forward price of natural gas increased approximately 17%. The 3-year forward price of WTI crude oil increased from approximately$57 per barrel to$60 per barrel, and the 3-year forward price of natural gas increased from approximately$2.70 per mcf to$3.16 per mcf as ofJune 30, 2021 andSeptember 30, 2021 , respectively. When commodity prices decline or if a decline is not offset by other factors, we would expect the value of our energy real asset investments to be adversely impacted, to the extent unhedged. In addition, because we hold certain energy real asset investments on our balance sheet, price movements can have an amplified impact on our financial results, to the extent unhedged, as we would directly bear the full extent of such gains or losses. For additional information regarding our energy real assets, see "-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies-Real Asset Investments" and see also "Risk Factors-Risks Related to the Assets We Manage-Our funds and our firm through our balance sheet may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" in our Annual Report. Following the significant volatility experienced in 2020, oil and natural gas prices have continued to recover throughout the course of 2021 alongside improving global demand. We expect downward price movements to have a negative impact on the fair value of our energy portfolio, all other things being equal, given those commodity prices are an input in our valuation models. However, due to near-term commodity derivative transactions, we expect long-term oil and natural gas prices to be a more significant driver of the valuation of our energy investments in asset management than spot prices. As ofSeptember 30, 2021 , energy investments in oil and gas assets make up approximately 1% of our assets under management, 1% of our total GAAP assets and 1% of our total segment assets. Business Conditions Our operating revenues consist of fees, performance income and investment income. Our ability to grow our revenues depends in part on our ability to attract new capital and investors, our successful deployment of capital including from our balance sheet and our ability to realize investments at a profit. Our ability to attract new capital and investors. Our ability to attract new capital and investors in our funds is driven, in part, by the extent to which they continue to see the alternative asset management industry generally, and our investment products specifically, as attractive means for capital appreciation or income. In addition, our ability to attract new capital and investors in our insurance business is driven, in part, by the extent to which they continue to see the life and annuity insurance industry generally, and in certain cases our re-insurance vehicles, as attractive means for capital appreciation or income. Since 2010, we have expanded into strategies such as real assets, credit, core, impact and, through hedge fund partnerships, hedge funds, and most recently, insurance. In several of our asset management strategies, our first time funds have begun raising successor funds, and we expect the cost of raising such successor funds to be lower. We have also reached out to new fund investors, including retail and high net worth investors. However, fundraising continues to be competitive. While our Asian Fund IV, European Fund V, North America Fund XIII, Real Estate Partners Americas III, Real Estate Partners Europe II, Global Infrastructure Investors IV and Next Generation Technology Growth Fund II exceeded the size of their respective predecessor funds, there is no assurance that fundraises for our other flagship investment funds or vehicles or for our newer 133
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strategies and their successor funds will experience similar success. If we are unable to successfully raise comparably sized or larger funds, our AUM, FPAUM, and associated fees attributable to new capital raised in future periods may be lower than in prior years. See "Risk Factors-Risks Related to Our Business-Our inability to raise additional or successor funds (or raise successor funds of a comparable size as our predecessor funds) could have a material adverse impact on our business" in our Annual Report. Our ability to successfully deploy capital. Our ability to maintain and grow our revenue base is dependent upon our ability to successfully deploy the capital available to us as well as our participation in capital markets transactions. Greater competition, high valuations, increased overall cost of credit and other general market conditions may impact our ability to identify and execute attractive investments. Additionally, because we seek to make investments that have an ability to achieve our targeted returns while taking on a reasonable level of risk, we may experience periods of reduced investment activity. We have a long-term investment horizon and the capital deployed in any one quarter may vary significantly from the capital deployed in any other quarter or the quarterly average of capital deployed in any given year. Reduced levels of transaction activity also tends to result in reduced potential future investment gains, lower transaction fees and lower fees for our capital markets business line, which may earn fees in the syndication of equity or debt. In our insurance business, we deploy capital by investing in assets that are anticipated to generate net investment income in excess of the net cost of insurance. If we are unable to originate or source attractive investments, the success and growth in revenues of our insurance business will be adversely impacted. See "Risk Factors-Risks Related to the Assets We Manage-Changes in the debt financing markets may negatively impact the ability of our investment funds, their portfolio companies and strategies pursued with our balance sheet assets to obtain attractive financing for their investments or to refinance existing debt and may increase the cost of such financing or refinancing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income" in our Annual Report. Our ability to realize investments. Challenging market and economic conditions may adversely affect our ability to exit and realize value from our investments and result in lower-than-expected returns. Although the equity markets are not the only means by which we exit investments from our funds, the strength and liquidity of theU.S. and relevant global equity markets generally, and the initial public offering market specifically, affect the valuation of, and our ability to successfully exit, our equity positions in the portfolio companies of our funds in a timely manner. We may also realize investments through strategic sales. When financing is not available or becomes too costly, it may be more difficult to find a buyer that can successfully raise sufficient capital to purchase our investments. In our insurance business, we depend on the ability of our investments to generate their anticipated returns, through the payment of interest and dividends and interest as well as return of principal, in the amounts and at the times that we expect them to be made in order to manage our obligations to make payments to our policyholders. If policyholder behavior differs from our expectations, we may be forced to sell our investments earlier than we anticipated and during market conditions where we may realize losses on the investment. In addition, material delays in payments or impairments to our anticipated investment returns could have material adverse effects to our results of operations. For additional information about how business environment and market conditions affect Global Atlantic, see "-Global Atlantic's Investment Portfolio." Basis of Accounting We consolidate the financial results ofKKR Group Partnership and its consolidated entities, which include the accounts of our investment advisers, broker-dealers, Global Atlantic's insurance companies, the general partners of certain unconsolidated investment funds, general partners of consolidated investment funds and their respective consolidated investment funds and certain other entities including certain CLOs and CMBS. We refer to CLOs and CMBS as collateralized financing entities ("CFEs"). When an entity is consolidated, we reflect the accounts of the consolidated entity, including its assets, liabilities, revenues, expenses, investment income, cash flows and other amounts, on a gross basis. While the consolidation of a consolidated fund or entity does not have an effect on the amounts of Net Income Attributable to KKR or KKR's stockholders' capital that KKR reports, the consolidation does significantly impact the financial statement presentation under GAAP. This is due to the fact that the accounts of the consolidated entities are reflected on a gross basis while the allocable share of those amounts that are attributable to third parties are reflected as single line items. The single line items in which the accounts attributable to third parties are recorded are presented as noncontrolling interests on the consolidated statements of financial condition and net income (loss) attributable to noncontrolling interests on the consolidated statements of operations. The presentations in the financial statements reflect the significant industry diversification of KKR by its acquisition of Global Atlantic. GlobalAtlantic operates an insurance business, and KKR operates an asset management business, each of which possess distinct characteristics. As a result, KKR developed a two-tiered approach for the financial statements presentations in this Management's Discussion and Analysis. KKR believes that these separate presentations provide a more 134
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informative view of the consolidated financial position and results of operations than traditional aggregated presentations. KKR believes that reporting Global Atlantic's insurance operations separately is appropriate given, among other factors, the relative significance of Global Atlantic's policy liabilities, which are not obligations of KKR (other than the insurance companies that issued them). If a traditional aggregated presentation were to be used, KKR would expect to eliminate or combine several identical or similar captions, which would condense the presentations but would reduce transparency. KKR also believes that using a traditional aggregated presentation would result in no new line items compared to the two-tier presentation included in the financial statements in this report. We acquired Global Atlantic onFebruary 1, 2021 ; accordingly, the results of Global Atlantic's insurance operations included in our condensed consolidated results of operations for the nine months endedSeptember 30, 2021 are fromFebruary 1, 2021 (the closing date of the acquisition) throughSeptember 30, 2021 . All the intercompany transactions have been eliminated. For a further discussion of our consolidation policies, see Note 2 "Summary of Significant Accounting Policies" to our financial statements included elsewhere in this report. The summary of the significant accounting policies has been organized considering the two-tiered approach described above and includes a section for common accounting policies and an accounting policy section for each of the two tiers when a policy is specific to one of the tiers.
Key Financial Measures Under GAAP - Asset Management
The following discussion of key financial measures under GAAP is based on KKR's
asset management business as of
Revenues
Fees and Other
Fees and other consist primarily of (i) management and incentive fees from
providing investment management services to unconsolidated funds, CLOs, other
vehicles, and separately managed accounts; (ii) transaction fees earned in
connection with successful investment transactions and from capital markets
activities; (iii) monitoring fees from providing services to portfolio
companies; (iv) expense reimbursements from certain investment funds and
portfolio companies; (v) revenue earned by oil and gas entities that are
consolidated; and (vi) consulting fees. These fees are based on the contractual
terms of the governing agreements and are recognized when earned, which
coincides with the period during which the related services are performed and in
the case of transaction fees, upon closing of the transaction. Monitoring fees
may provide for a termination payment following an initial public offering or
change of control. These termination payments are recognized in the period when
the related transaction closes.
Capital Allocation-Based Income (Loss)
Capital allocation-based income (loss) is earned from those arrangements whereby
KKR serves as general partner and includes income or loss from KKR's capital
interest as well as "carried interest" which entitles KKR to a disproportionate
allocation of investment income or loss from an investment fund's limited
partners.
For a further discussion of our revenue policies, see Note 2 "Summary of
Significant Accounting Policies" to our financial statements included elsewhere
in this report.
Expenses
Compensation and Benefits
Compensation and Benefits expense includes (i) base cash compensation consisting
of salaries and wages, (ii) benefits, (iii) carry pool allocations, (iv)
equity-based compensation, and (v) discretionary cash bonuses.
To supplement base cash compensation, benefits, carry pool allocations, and
equity-based compensation, we typically pay discretionary cash bonuses, which
are included in Compensation and Benefits expense in the consolidated statements
of operations, based principally on the level of (i) management fees and other
fee revenues (including incentive fees), (ii) realized carried interest and
(iii) realized investment income earned during the year. The amounts paid as
discretionary cash bonuses, if any, are at our sole discretion and vary by
individual to individual and from period to period, including having no cash
bonus. We accrue discretionary cash bonuses when payment becomes probable and
reasonably estimable which is generally in the
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period when we make the decision to pay discretionary cash bonuses and is based upon a number of factors, including the recognition of fee revenues, realized carried interest, realized investment income and other factors determined during the year. Beginning in 2021, we expect to pay our employees by assigning a percentage range to each component of distributable revenues. Based on the current components and blend of our distributable revenues on an annual basis, we expect to use approximately 2025% of fee revenues, 6070% of realized carried interest and 1020% of realized investment income and hedge fund partnership incentive fees to pay our asset management employees. Because these ranges are applied to applicable distributable revenue components independently, and on an annual basis, the amount paid as a percentage of total distributable revenues will vary and will, for example, likely be higher in a period with relatively higher realized carried interest and lower in a period with relatively lower realized carried interest. We decide whether to pay a discretionary cash bonus and determines the percentage of applicable revenue components to pay compensation only upon the occurrence of the realization event. There is no contractual or other binding obligation that requires us to pay a discretionary cash bonus to the asset management employees, except in limited circumstances. Assuming that we had accrued compensation of (i) 65% of the unrealized carried interest earned by the funds that allocate 40% and 43% to the carry pool and (ii) 15% of the unrealized gains in our Principal Activities business line (in each case at the mid-point of the ranges above),KKR & Co. Inc. Stockholders' Equity - Series I and II Preferred, Common Stock as ofSeptember 30, 2021 would have been reduced by approximately$2.69 per share, compared to our reported$27.13 per share on such date, and our book value as ofSeptember 30, 2021 would have been reduced by approximately$2.61 per adjusted share, compared to our reported book value of$28.06 per adjusted share on such date. Carry Pool Allocation With respect to our funds that provide for carried interest, we allocate a portion of the realized and unrealized carried interest that we earn to a carry pool established atKKR Associates Holdings L.P. , which is not a KKR subsidiary, from which our asset management employees and certain other carry pool participants are eligible to receive a carried interest allocation. The allocation is determined based upon a fixed arrangement betweenKKR Associates Holdings L.P. and us, and we do not exercise discretion on whether to make an allocation to the carry pool upon a realization event. These amounts are accounted for as compensatory profit sharing arrangements in Accrued Expenses and Other Liabilities within the accompanying consolidated statements of financial condition in conjunction with the related carried interest income and are recorded as compensation expense. Upon a reversal of carried interest income, the related carry pool allocation, if any, is also reversed. Accordingly, such compensation expense is subject to both positive and negative adjustments. InFebruary 2021 , with the approval of a majority of our independent directors, KKR amended the percentage of carried interest that is allocable to the carry pool to 65% for (i) current investment funds for which no or de minimis amounts of carried interest was accrued as ofDecember 31, 2020 and (ii) all future funds. For all other funds, the percentage of carried interest remains 40% or 43%, as applicable. The percentage of carried interest allocable to the carry pool may be increased above 65% only with the approval of a majority of our independent directors. To account for the difference in the carry pool allocation percentages, we expect to use a portion of realized carried interest from the older funds equal to the difference between 65% and 40% or 43%, as applicable, to supplement the carry pool and to pay amounts as discretionary cash bonus compensation as described above to our asset management employees. The amounts paid as discretionary cash bonuses, if any, are at our discretion and vary from individual to individual and from period to period, including having no cash bonus at all for certain employees. See "-Critical Accounting Policies - Asset Management-Recognition of Carried Interest in the Statement of Operations" and "-Key Financial Measures Under GAAP - Asset Management-Expenses-Compensation and Benefits." On the Sunset Date, KKR will acquire control ofKKR Associates Holdings and will commence making decisions regarding the allocation of carry proceeds pursuant to the limited partnership agreement ofKKR Associates Holdings . Until the Sunset Date, our Co-Founders will continue to make decisions regarding the allocation of carry proceeds to themselves and others, pursuant to the limited partnership agreement ofKKR Associates Holdings L.P. , provided that any allocation of carry proceeds to the Co-Founders will be on a percentage basis consistent with past practice. Equity-based Compensation In addition to the cash-based compensation and carry pool allocations as described above, employees receive equity awards under the Equity Incentive Plans, most of which are subject to service-based vesting typically over a three to five-year period from the date of grant, and some of which are subject to the achievement of market-based conditions. 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General, Administrative and Other
General, administrative and other expense consists primarily of professional
fees paid to legal advisors, accountants, advisors and consultants, insurance
costs, travel and related expenses, communications and information services,
depreciation and amortization charges, expenses incurred by oil and gas
entities, CLOs and investment funds that are consolidated, costs incurred in
connection with pursuing potential investments that do not result in completed
transactions ("broken-deal expenses"), expense reimbursements, placement fees
and other general operating expenses. A portion of these general administrative
and other expenses, in particular broken-deal expenses, are borne by fund
investors.
Investment Income (Loss)
Net Gains (Losses) from Investment Activities
Net gains (losses) from investment activities consist of realized and unrealized
gains and losses arising from our investment activities as well as income earned
from certain equity method investments. Fluctuations in net gains (losses) from
investment activities between reporting periods is driven primarily by changes
in the fair value of our investment portfolio as well as the realization of
investments. The fair value of, as well as the ability to recognize gains from,
our investments is significantly impacted by the global financial markets,
which, in turn, affects the net gains (losses) from investment activities
recognized in any given period. Upon the disposition of an investment,
previously recognized unrealized gains and losses are reversed and an offsetting
realized gain or loss is recognized in the current period. Since our investments
are carried at fair value, fluctuations between periods could be significant due
to changes to the inputs to our valuation process over time. For a further
discussion of our fair value measurements and fair value of investments, see
"-Critical Accounting Policies - Combined-Fair Value Measurements."
Dividend Income
Dividend income consists primarily of distributions that we and our consolidated
investment funds receive from portfolio companies in which we and our
consolidated investment funds invest. Dividend income is recognized primarily in
connection with (i) dispositions of operations by portfolio companies,
(ii) distributions of cash generated from operations from portfolio investments,
and (iii) other significant refinancings undertaken by portfolio investments.
Interest Income
Interest income consists primarily of interest that is received on our credit instruments in which we and our consolidated investment funds, CLOs and other entities invest as well as interest on our cash and other investments.
Interest Expense
Interest expense is incurred from debt issued by KKR, including debt issued by
KFN, credit facilities entered into by KKR, debt securities issued by
consolidated CFEs, and financing arrangements at our consolidated investment
funds entered into primarily with the objective of managing cash flow. KFN's
debt obligations are non-recourse to KKR beyond the assets of KFN. Debt
securities issued by consolidated CFEs are supported solely by the investments
held at the CFE and are not collateralized by assets of any other KKR entity.
Our obligations under financing arrangements at our consolidated funds are
generally limited to our pro rata equity interest in such funds. However, in
some circumstances, we may provide limited guarantees of the obligations of our
general partners in an amount equal to its pro rata equity interest in such
funds. Our management companies bear no obligations with respect to financing
arrangements at our consolidated funds. We also may provide other kinds of
guarantees. See "-Liquidity."
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Key Financial Measures Under GAAP - Insurance The following discussion of key financial measures under GAAP is based on KKR's insurance business as conducted by Global Atlantic as ofSeptember 30, 2021 .
Revenues
Premiums
Premiums primarily relate to payout annuities with life contingencies and whole life and term life insurance policies, recognized when due from the policyholders. Premiums are reported net of premiums ceded under reinsurance agreements. Policy fees Policy fees include charges assessed against policyholder account balances for mortality, administration, separate account, benefit rider and surrender fees. Net investment income Net investment income reflects the income earned on our investments, net of any associated investment expenses (including management fees charged by the asset management segment) and net of ceded amounts under reinsurance agreements. Net investment income includes, amongst other things (i) interest earned on our fixed income available-for-sale and fixed-income trading investments, (ii) interest income and other related fees from our mortgage and other loan receivables, (iii) interest on funds withheld at interest receivables, (iv) proportional share of income from equity-method investments and (v) income from physical assets, such as renewable energy plants, railcars, and airplanes (net of depreciation and operating expenses). Net investment gains Net investment gains primarily consists of (i) realized gains and losses from the disposal of investments, (ii) unrealized gains and losses from investments held for trading, or fair value remeasurements recognized in earnings as a result of the election of a fair-value option, (iii) unrealized gains and losses on funds withheld at interest, (iv) unrealized gains and losses from derivatives not designated in an hedging relationship and (v) allowances for credit losses, and other impairments of investments.
Other income
Other income is primarily comprised of administration, management fees and
distribution fees.
Expenses
Policy benefits and claims
Policy benefits and claims represent the current period expense associated with
providing insurance benefits to policyholders, including claims and benefits
paid, interest credited to policyholders, changes in policy liability reserves
(including fair value reserves), amortization of cost of reinsurance
liabilities, and amortization of deferred sales inducements.
Amortization of policy acquisition costs
Amortization of policy acquisition costs primarily consist on amortization of
value of business acquired and deferred policy acquisition costs.
Insurance expense
Insurance expenses are primarily comprised of commissions expense, net of
amounts capitalized, reinsurance ceding allowances, premium taxes, amortization
of acquired intangibles and captive financing charges.
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Interest expense
Interest expense is incurred from insurance segment debt issued, including
related interest rate swaps, credit facilities and other financing agreements.
General, administrative and other General, administrative and other expenses are primarily comprised of employee compensation and benefit expenses, third-party administrator, or "TPA," policy servicing fees, administrative and professional services, and other operating expenses.
Other Key Financial Measures Under GAAP
Income Taxes
KKR & Co. Inc. is a domestic corporation forU.S. federal income tax purposes and is subject toU.S. federal, state and local income taxes at the entity level on its share of taxable income. In addition,KKR Group Partnership and certain of its subsidiaries operate as partnerships forU.S. federal tax purposes but as taxable entities for certain state, local or non-U.S. tax purposes. Moreover, certain corporate subsidiaries of KKR, including certain Global Atlantic subsidiaries, are domestic corporations forU.S. federal income tax purposes and are subject toU.S. federal, state, and local income taxes. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties. We review our tax positions quarterly and adjust our tax balances as new information becomes available. For a further discussion of our income tax policies, see Note 2 "Summary of Significant Accounting Policies" and Note 17 "Income Taxes" to our financial statements included elsewhere in this report. Net Income (Loss) Attributable to Noncontrolling Interests Net income (loss) attributable to noncontrolling interests primarily represents the ownership interests that certain third parties hold in entities that are consolidated in the financial statements as well as the ownership interests inKKR Group Partnership that are held byKKR Holdings . The allocable share of income and expense attributable to these interests is accounted for as net income (loss) attributable to noncontrolling interests. Given the consolidation of certain of our investment funds and the significant ownership interests inKKR Group Partnership held byKKR Holdings , we expect a portion of net income (loss) will continue to be attributed to noncontrolling interests in our business. For a further discussion of our noncontrolling interests policies, see Note 21 "Equity" to the financial statements included elsewhere in this report. Key Non-GAAP Performance Measures and Other Operating Measures The key non-GAAP and other operating and performance measures that follow are used by management in making operational and resource deployment decisions as well as assessing the performance of KKR's businesses. They include certain financial measures that are calculated and presented using methodologies other than in accordance with GAAP. These non-GAAP measures as described below are presented prior to giving effect to the allocation of income (loss) betweenKKR & Co. Inc. andKKR Holdings L.P. (and holders of other exchangeable securities) and as such represent the entire KKR business in total. In addition, these non-GAAP measures are presented without giving effect to the consolidation of the investment funds and collateralized financing entities ("CFEs") that KKR manages. We believe that providing these non-GAAP measures on a supplemental basis to our GAAP results is helpful to stockholders in assessing the overall performance of KKR's business. These non-GAAP measures should not be considered as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable, are included under "-Reconciliations to GAAP Measures." 139
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After-tax Distributable Earnings After-tax distributable earnings is a non-GAAP performance measure of KKR's earnings, which is derived from KKR's reported segment results. After-tax distributable earnings is used to assess the performance of KKR's business operations and measures the earnings potentially available for distribution to its equity holders or reinvestment into its business. After-tax distributable earnings is equal to Distributable Operating Earnings less Interest Expense, Series A and B Preferred Stock dividends, Net Income Attributable to Noncontrolling Interests and Income Taxes Paid. Series C Mandatory Convertible Preferred Stock dividends have been excluded from After-tax Distributable Earnings, because the definition of Adjusted Shares used to calculate After-tax Distributable Earnings per Adjusted Share assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of common stock. Income Taxes Paid represents the implied amount of income taxes that would be paid assuming that all pre-tax distributable earnings were allocated toKKR & Co. Inc. and taxed at the same effective rate, which assumes that all units inKKR Holdings L.P. and other exchangeable securities were exchanged for common stock ofKKR & Co. Inc. Income Taxes Paid includes amounts paid pursuant to the tax receivable agreement and the benefit of tax deductions arising from equity-based compensation, which reduces income taxes paid or payable during the period. Equity based compensation expense is excluded from After-tax Distributable Earnings, because (i) KKR believes that the cost of equity awards granted to employees does not contribute to the earnings potentially available for distributions to its equity holders or reinvestment into its business and (ii) excluding this expense makes KKR's reporting metric more comparable to the corresponding metric presented by other publicly traded companies in KKR's industry, which KKR believes enhances an investor's ability to compare KKR's performance to these other companies. If tax deductions from equity-based compensation were to be excluded from Income Taxes Paid, KKR's After-tax Distributable Earnings would be lower and KKR's effective tax rate would appear to be higher, even though a lower amount of income taxes would have actually been paid or payable during the period. KKR separately discloses the amount of tax deduction from equity-based compensation for the period reported and the effect of its inclusion in After-tax Distributable Earnings for the period. KKR makes these adjustments when calculating After-tax Distributable Earnings in order to more accurately reflect the net realized earnings that are expected to be or become available for distribution to KKR's equity holders or reinvestment into KKR's business. However, After-tax Distributable Earnings does not represent and is not used to calculate actual dividends under KKR's dividend policy, which is a fixed amount per period, and After-tax Distributable Earnings should not be viewed as a measure of KKR's liquidity. Book Value Book Value is a nonGAAP performance measure of the net assets of KKR and is used by management primarily in assessing the unrealized value of KKR's net assets presented on a basis that (i) deconsolidates KKR's investment funds and CFEs that KKR manages, (ii) includes the net assets that are attributable toKKR Holdings L.P. , and (iii) includes KKR's ownership of the net assets of GlobalAtlantic . We believe this measure is useful to stockholders as it provides additional insight into the net assets of KKR excluding those net assets that are allocated to the investors of KKR funds and other noncontrolling interest holders and to the holders of Preferred Stock. KKR's book value includes (x) the net impact of KKR's tax assets and liabilities as prepared under GAAP and (y) the implied amount of (1) tax assets and liabilities attributable toKKR Holdings L.P. as if it was subject to corporate income taxes and (2) the recognition of deferred tax liabilities relating to certain assets ofKKR Group Partnership L.P. that is expected to occur upon the completion of the mergers contemplated by the previously announced Reorganization Agreement, datedOctober 8, 2021 . Series C Mandatory Convertible Preferred Stock has been included in book value, because the definition of adjusted shares used to calculate book value per adjusted share assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of common stock. To calculate Global Atlantic book value and to make it more comparable with the corresponding metric presented by other publicly traded companies in GlobalAtlantic's industry, Global Atlantic book value excludes (i) accumulated other comprehensive income and (ii) accumulated change in fair value of reinsurance balances and related assets, net of deferred acquisition costs and income tax. In the second quarter of 2021, the definition of book value was amended to include the implied amount of tax assets and liabilities attributable toKKR Holdings L.P. as if it was subject to corporate income taxes. This change is useful to management and investors in assessing book value because the definition now includes the anticipated impacts that the payment of tax liabilities by KKR would have on book value. Prior periods have not been adjusted for this change, although it is expected to have had the effect of reducing book value reported for prior periods. Starting in the third quarter of 2021, the definition of book value was amended to include the anticipated recognition of deferred tax liabilities relating to certain assets ofKKR Group Partnership L.P. that is expected to occur upon the completion of the mergers contemplated by the Reorganization Agreement. This change is useful to management and investors in assessing book value because the definition now includes the anticipated impacts that the mergers contemplated by the Reorganization Agreement, which are expected to be completed in 2022, would have on book value. 140
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Distributable Operating Earnings
Distributable operating earnings is a non-GAAP performance measure that KKR believes is useful to stockholders as it provides a supplemental measure of our operating performance without taking into account items that KKR does not believe arise from or relate directly to KKR's operations. Distributable Operating Earnings is presented prior to giving effect to the allocation of income (loss) amongKKR & Co. Inc. ,KKR Holdings L.P. and holders of other exchangeable securities, and the consolidation of the investment funds, vehicles and accounts that KKR advises, manages or sponsors (including collateralized financing entities). Distributable Operating Earnings excludes: (i) equity-based compensation charges, (ii) amortization of acquired intangibles, (iii) strategic corporate transaction-related charges and (iv) non-recurring items, if any. Strategic corporate transaction-related items arise from corporate actions and consist primarily of (i) impairments, (ii) non-monetary gains or losses on divestitures, (iii) transaction costs from strategic acquisitions, and (iv) depreciation on real estate that KKR owns and occupies. Inter-segment transactions are not eliminated from segment results when management considers those transactions in assessing the results of the respective segments. These transactions include (i) management fees earned by KKR as the investment adviser for Global Atlantic insurance companies and (ii) interest income and expense based on lending arrangements where one or more KKR subsidiaries borrow from a Global Atlantic insurance subsidiary. Inter-segment transactions are recorded by each segment based on the definitive documents that contain arms' length terms and comply with applicable regulatory requirements. Distributable Operating Earnings represents operating earnings of KKR's Asset Management and Insurance segments, which are comprised of the following: •Asset Management Segment Operating Earnings is the segment profitability measure used to make operating decisions and to assess the performance of the Asset Management segment and is comprised of: (i) Fee Related Earnings, (ii) Realized Performance Income, (iii) Realized Performance Income Compensation, (iv) Realized Investment Income, and (v) Realized Investment Income Compensation. Asset Management Segment Operating Earnings excludes (i) unrealized carried interest, (ii) net unrealized gains (losses) on investments, and (iii) related unrealized performance income compensation. Management fees earned by KKR as the adviser, manager or sponsor for its investment funds, vehicles and accounts, including management fees paid to KKR by GlobalAtlantic's insurance companies and management fees paid to Global Atlantic by reinsurance investment vehicles, are included in Asset Management Segment Operating Earnings. •Insurance Segment Operating Earnings is the segment profitability measure used to make operating decisions and to assess the performance of the Insurance segment and is comprised of: (i) Net Investment Income, (ii)Net Cost of Insurance, (iii) General, Administrative, and Other Expenses, (iv) Income Taxes, and (v) Net Income Attributable to Noncontrolling Interests. The non-operating adjustments made to derive Insurance Segment Operating Earnings eliminate the impact of: (i) realized (gains) losses related to asset/liability matching investments strategies, (ii) unrealized investment (gains) losses, (iii) changes in the fair value of derivatives, embedded derivatives, and fair value liabilities for fixed-indexed annuities, indexed universal life contracts and variable annuities, and (iv) the associated income tax effects of all exclusions from Insurance Segment Operating Earnings except for equity-based compensation expense. Insurance Segment Operating Earnings includes (i) realized gains and losses not related to asset/liability matching investments strategies and (ii) the investment management fee expenses that are earned by KKR as the investment adviser of Global Atlantic's insurance companies. Fee Related Earnings ("FRE") Fee related earnings is a performance measure used to assess the Asset Management segment's generation of profits from revenues that are measured and received on a recurring basis and are not dependent on future realization events. KKR believes this measure is useful to stockholders as it provides additional insight into the profitability of KKR's fee generating asset management and capital markets businesses and other recurring revenue streams. FRE equals (i) Management Fees, (ii) Transaction and Monitoring Fees, Net and (iii) Fee Related Performance Revenues, less (x) Fee Related Compensation, and (y) Other Operating Expenses. •Fee Related Performance Revenues refers to the realized portion of Incentive Fees from certain AUM that has an indefinite term and for which there is no immediate requirement to return invested capital to investors upon the realization of investments. Fee-related performance revenues consists of performance fees (i) to be received from our investment funds, vehicles and accounts on a recurring basis, and (ii) that are not dependent on a realization event involving investments held by the investment fund, vehicle or account. •Fee Related Compensation refers to the compensation expense, excluding equity-based compensation, paid from (i) Management Fees, (ii) Transaction and Monitoring Fees, Net, and (iii) Fee Related Performance Revenues. •Other Operating Expenses represents the sum of (i) occupancy and related charges and (ii) other operating expenses. 141
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Total Asset Management Segment Revenues
Total asset management segment revenues is a performance measure that represents the realized revenues of the Asset Management segment (which excludes unrealized carried interest and unrealized net gains (losses) on investments) and is the sum of (i) Management Fees, (ii) Transaction and Monitoring Fees, Net, (iii) Fee Related Performance Revenues, (iv) Realized Performance Income, and (v) Realized Investment Income. KKR believes that this performance measure is useful to stockholders as it provides additional insight into the realized revenues generated by KKR's asset management segment. Adjusted Shares Adjusted shares represents shares of common stock ofKKR & Co. Inc. outstanding under GAAP adjusted to include shares issuable upon exchange of all units ofKKR Holdings L.P. and other exchangeable securities and the number of shares of common stock assumed to be issuable upon conversion of the Series C Mandatory Convertible Preferred Stock. Weighted average adjusted shares is used in the calculation of After-tax Distributable Earnings per Adjusted Share, and Adjusted Shares is used in the calculation of Book Value per Adjusted Share. Assets Under Management ("AUM") Assets under management represent the assets managed, advised or sponsored by KKR from which KKR is entitled to receive management fees or performance income (currently or upon a future event), general partner capital, and assets managed, advised or sponsored by our strategic BDC partnership and the hedge fund and other managers in which KKR holds an ownership interest. We believe this measure is useful to stockholders as it provides additional insight into the capital raising activities of KKR and its hedge fund and other managers and the overall activity in their investment funds and other managed or sponsored capital. KKR calculates the amount of AUM as of any date as the sum of: (i) the fair value of the investments of KKR's investment funds and Global Atlantic's insurance companies; (ii) uncalled capital commitments from these funds, including uncalled capital commitments from which KKR is currently not earning management fees or performance income; (iii) the fair value of investments in KKR's co-investment vehicles; (iv) the par value of outstanding CLOs; (v) KKR's pro rata portion of the AUM of hedge fund and other managers in which KKR holds an ownership interest; (vi) all AUM of KKR's strategic BDC partnership; and (vii) the fair value of other assets managed or sponsored by KKR. The pro rata portion of the AUM of hedge fund and other managers is calculated based on KKR's percentage ownership interest in such entities multiplied by such entity's respective AUM. KKR's definition of AUM (i) is not based on any definition of AUM that may be set forth in the governing documents of the investment funds, vehicles, accounts or other entities whose capital is included in this definition, (ii) includes assets for which KKR does not act as an investment adviser, and (iii) is not calculated pursuant to any regulatory definitions. Capital Invested Capital invested is the aggregate amount of capital invested by (i) KKR's investment funds and Global Atlantic's insurance companies, (ii) KKR's Principal Activities business line as a co-investment, if any, alongside KKR's investment funds, and (iii) KKR's Principal Activities business line in connection with a syndication transaction conducted byKKR's Capital Markets business line, if any. Capital invested is used as a measure of investment activity at KKR during a given period. We believe this measure is useful to stockholders as it provides a measure of capital deployment across KKR's business lines. Capital invested includes investments made using investment financing arrangements like credit facilities, as applicable. Capital invested excludes (i) investments in certain leveraged credit strategies, (ii) capital invested by KKR's Principal Activities business line that is not a co-investment alongside KKR's investment funds, and (iii) capital invested by KKR's Principal Activities business line that is not invested in connection with a syndication transaction byKKR's Capital Markets business line. Capital syndicated byKKR's Capital Markets business line to third parties other than KKR's investment funds or Principal Activities business line is not included in capital invested. Fee Paying AUM ("FPAUM") Fee paying AUM represents only the AUM from which KKR is entitled to receive management fees. We believe this measure is useful to stockholders as it provides additional insight into the capital base upon which KKR earns management fees. FPAUM is the sum of all of the individual fee bases that are used to calculate KKR's and its hedge fund and BDC partnership management fees and differs from AUM in the following respects: (i) assets and commitments from which KKR is not entitled to receive a management fee are excluded (e.g., assets and commitments with respect to which it is entitled to receive only performance income or is otherwise not currently entitled to receive a management fee) and (ii) certain assets, primarily in its private equity funds, are reflected based on capital commitments and invested capital as opposed to fair value because fees are not impacted by changes in the fair value of underlying investments. 142
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Uncalled Commitments
Uncalled commitments is the aggregate amount of unfunded capital commitments
that KKR's investment funds and carry-paying co-investment vehicles have
received from partners to contribute capital to fund future investments. We
believe this measure is useful to stockholders as it provides additional insight
into the amount of capital that is available to KKR's investment funds and carry
paying co-investment vehicles to make future investments. Uncalled commitments
are not reduced for investments completed using fund-level investment financing
arrangements or investments we have committed to make but remain unfunded at the
reporting date.
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Consolidated Results of Operations (GAAP Basis) (Unaudited)
The following is a discussion of our consolidated results of operations for the three months endedSeptember 30, 2021 and 2020. You should read this discussion in conjunction with the financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected our segment results in these periods, see "-Analysis of Segment Operating Results." See "-Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations. The presentation of our consolidated results of operations that follows reflects the significant industry diversification of KKR by its acquisition of GlobalAtlantic . GlobalAtlantic operates an insurance business, and KKR operates an asset management business, each of which possess distinct characteristics. As a result, KKR developed a two-tiered presentation approach, where GlobalAtlantic's insurance operations are presented separately from KKR's asset management business. Additionally, the results of Global Atlantic's insurance operations included in our consolidated results of operations are fromFebruary 1, 2021 (closing date of the acquisition) throughSeptember 30, 2021 . Three Months Ended September 30, September 30, 2021 2020 Change ($ in thousands) Revenues Asset Management Fees and Other$ 718,968 $ 563,340 $ 155,628 Capital Allocation-Based Income (Loss) 1,526,667 1,331,898 194,769 2,245,635 1,895,238 350,397 Insurance Net Premiums 974,903 - 974,903 Policy Fees 310,381 - 310,381 Net Investment Income 758,381 - 758,381 Net Investment Gains (Losses) 162,127 - 162,127 Other Income 31,938 - 31,938 2,237,730 - 2,237,730 Total Revenues 4,483,365 1,895,238 2,588,127 Expenses Asset Management Compensation and Benefits 1,012,837 882,339 130,498 Occupancy and Related Charges 17,438 17,321 117 General, Administrative and Other 203,977 194,039 9,938 1,234,252 1,093,699 140,553 Insurance Policy Benefits and Claims 1,697,046 - 1,697,046 Amortization of Policy Acquisition Costs (16,900) - (16,900) Interest Expense 22,437 - 22,437 Insurance Expenses 89,534 - 89,534 General, Administrative and Other 158,873 - 158,873 1,950,990 - 1,950,990 Total Expenses 3,185,242 1,093,699 2,091,543 Investment Income (Loss) - Asset Management Net Gains (Losses) from Investment Activities 2,116,647 2,284,602 (167,955) Dividend Income 121,484 116,379 5,105 Interest Income 402,839 354,865 47,974 144
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Interest Expense (278,166) (223,709) (54,457) Total Investment Income (Loss) 2,362,804 2,532,137 (169,333) Income (Loss) Before Taxes 3,660,927 3,333,676 327,251 Income Tax Expense (Benefit) 379,282 359,375 19,907 Net Income (Loss) 3,281,645 2,974,301 307,344 Net Income (Loss) Attributable to Redeemable Noncontrolling Interests 1,519 - 1,519 Net Income (Loss) Attributable to Noncontrolling Interests 2,123,569 1,909,458 214,111 Net Income (Loss) Attributable to KKR & Co. Inc. 1,156,557 1,064,843 91,714 Series A Preferred Stock Dividends - 5,822 (5,822) Series B Preferred Stock Dividends 7,953 2,519 5,434 Series C Mandatory Convertible Preferred Stock Dividends 17,250 - 17,250 Net Income (Loss) Attributable toKKR & Co. Inc. Common Stockholders$ 1,131,354 $ 1,056,502 $ 74,852 145
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FIDELITY NATIONAL FINANCIAL, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
BIGLARI HOLDINGS INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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